Why auctions work

A carefully planned accelerated marketing program gives your property high exposure. You can stop costs of maintenance, vandalism, insurance, utilities, mortgage payments and other costs of ownership. Auctions are an excellent way to convert assets to cash in a short time period.

Competitive bidding determines the best price for your properties. The perception of value of equipment and other assets and reality are not always the same. Reality says your assets are not worth a dime more than a person will pay and has the ability to pay for it. On the lawn or online, auctions are taking place in communities large and small across the country with more than a quarter trillion dollars in assets and goods being sold via auction every year.

C, auctions continue to be the most efficient and effective means of price discovery. Nobody challenges the value of their shares in Wal-Mart at the end of the day on Wall Street. However, mention selling everyday real estate, commercial assets and other assets via the competitive bidding of an auction and doubt and uncertainty immediately follows.

The process is straight forward, but perception clouds reality many times. An auction is simply a marketplace where assets or goods are sold via competitive bidding with the highest bid winning the rights to own.

Auctions are the purest and quickest form of price discovery. At an auction, the marketplace consumers , tell you how much they believe an asset is worth and how much they are willing to pay through incremental bidding.

No more. No less. At any point during an auction, every buyer as well as the seller can see by the current bid exactly what the market value is in real time, rather than the often unknown factor in a private treaty sale where other offers which may have been made are not disclosed.

If the written reserve price has been met or exceeded, then on the fall of the hammer, the sale is unconditional for both the seller and the buyer without any cooling off period. Both buyers and sellers sign the contract of sale immediately and a deposit is taken from the buyer at the same time which is held in trust until settlement occurs.

While the majority of people are in no rush to buy or sell, having a set time frame for an auction marketing campaign compels buyers to act within a 3 to 4 week period, or risk losing the property. It also encourages sellers to price their property appropriately and commit to spending some money on styling, presentation and advertising. These factors create excitement whether you are in the room or not.

Another psychological bias that operates in auctions is the endowment effect , where we tend to over-value things we already possess. By encouraging us to connect the bid our money with the sale item, bidding on items lets us fantasise about owning them — stimulating a kind of endowment effect. This is why the auction catalogue or the item picture and description on a website is so important. This forms part of the psychological journey the seller wants you to go on to imagine owning this item in advance, so you'll place a higher value on it, and so pay more to make imagination reality.

Persuasion plays a huge part here, and the best book you can read on the psychology of the subject is Robert Cialdini's Influence. Cialdini is a Professor of Social Psychology at Arizona State University, and he lists six major ways you can make yourself persuasive.

Auctions hit at least two of these six principles square on the nose. First, auctions use the principle of scarcity, whereby we overvalue things that we think might run out. Auction items are scarce in that they are unique only one person can have it , and scarce in time after the bids are finished, you've lost your chance.

Business Business Essentials. Table of Contents Expand. What Is an Auction? How Auctions Work. Example of Auctions. Traditional vs. Dutch Auctions. How to Buy a House at an Auction. Auctions Pros and Cons. Auction FAQs. Key Takeaways An auction is a sale in which buyers compete for an asset by placing bids. Auctions are conducted both live and online. In a closed auction, for example, the sale of a company, bidders are not aware of competing bids.

In an open auction, such as a livestock auction, bidders are aware of the other bids. Pros of Auctions Seller controls process Find rare items Buy at a discount Seller can maximize bargaining power.

Cons of Auctions Competitive process can deter some buyers Cost of running an auction is significant Competitive bidding process can drive up price. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts.

We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Related Terms Auction House A company that facilitates the buying and selling of assets, such as works of art and collectibles. Bid Definition A bid is an offer made by an investor, trader, or dealer to buy a security that stipulates the price and the quantity the buyer is willing to purchase.

How Absolute Auctions Work in Foreclosures and Other Circumstances An absolute auction is a type of auction where the sale is awarded to the highest bidder.

Absolute auctions do not have a reserve price, which sets a minimum required bid for the item to be sold. Dutch Auction Definition A Dutch auction is a public offering auction structure in which the price of the offering is set after taking in all bids to determine the highest price at which the total offering can be sold.

Bidder The bidder is the party offering to buy an asset from a seller at a specific price. Partner Links. Related Articles. Lifestyle Advice eBay vs. Amazon: What's the Difference?